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“China, New Eldorado of Franchise?” OMS – December 2004

In 2003, the franchise activity has increased by more than 44% compared to the year 2002. With more than 1900 local and foreign franchises’ brands, 70 000 franchisees and 300 other companies ready to enter… Would Chinese market represent the “new eldorado” for franchisors?

An emerging market
Mc Donald’s, Kentucky Fried Chicken, Dairy Queen, 7-eleven, Pizza Hut, Days Inn, Subway, Century 21… Nowadays, even if China appears as a promising destination for franchises brands, this phenomenon remains new. Indeed, most of franchisors such as Mc Donald’s or KFC started in China by implementing a joint-ventures network with local partners, instead of the traditional franchise model.

KFC entered the Chinese market as early as 1987, and became quickly one of the most famous foreign brands in China. Although its 1000 restaurants network (200 opened in 2002, 200 more in 2003), the group only began recently to franchise its brand. Mc Donald’s opened its first restaurant in 1992, and detains today a network composed of 560 restaurants, even if this franchisor only began last year to be interested in opportunities to develop its concept via a franchise.

Why were the franchisors reluctant to develop their traditional franchise model? China law, intellectual property problems, old infrastructures, and doubts concerning the respect of contracts terms, are the main reasons. The first effort from the Chinese government in order to develop a legal form to Fauchon’s franchise has been done through a regulation published in 1997. Under the control of The China Chainstore and Franchise Association, an organization almost governmental, the “Measures on the Management of Commercial Franchise Operations” regulation was closer of an agent regulation than a regulation especially dedicated to the franchise activity. A recent law more elaborated and adapted is under preparation, and should appear until the end of this year. This new law should give more guarantees for both the franchisor and the franchisee.

Success keys
Facing the complexity of Chinese market, franchisors have chosen different strategies. “Opportunists”, who privilege more reaction than pro-action, have chosen to sell their master franchise to anybody, ready to invest, and waiting, sometimes vainly, the royalties’ payment. Others, the “bulls in a Chinese shop” decided to enter by themselves this market, developing an intense commercial strategy, but often underestimating the difficulty of Chinese market, and overestimating their own franchise model. Finally, the “Global Thinkers – Local masters” decided to develop their franchise model through different master franchisees in charge of the development of specific territories. This strategy is really the most adapted to Chinese market. : be allied to different local partners who know the market, while keeping control on global strategy.

The President of Century 21 China, Bill Hunter, introduced the franchisee system in China only three years ago. Though this system has proved its value in many countries, Mr Hunter decided to set up a different philosophy for this country: find regional master franchisees in charge of managing franchisees on their respective territories. “They know the market better than we will never do. One of the magic keys for a franchise is also to localize its concept to each market, which has its own particularities, and they are here and are leaders in those different local markets. They know how to do, and the key of our dazzling growth is here: working with powerful regional partners, teaching them how to become franchisors”. Century 21 has today 200 franchises in 13 different provinces.

Think local
Not adapt its plan to local market could represent an important mistake in a Chinese development strategy. Another mistake would be to see the market as homogeneous. The customers’ habits and business culture are not only different between western world and China, but also different between every province in this country. We have to realize that there are as many differences between people of Guangzhou and people of Beijing, as between Finnish people and Spanish people. “The Asian market, in particular Chinese market, is really different of European and American ones. If international franchisors only copy what they did in their local market, it is possible that it doesn’t work. They have to valid their model in Chinese market and set up the necessary adjustments. In that case, they would have built their success”, comments Guo Geping, the China Chain & Franchise Association President.

But “think local” is not only adapt its product or services to the marketplace; the global development strategy must consider the local question: sourcing, retailing network, competition, financing… it’s only by this way that franchisors just like Century 21 has had a real success in China.

Partner choice
With more than 20 years experience in Asian Business Development Consulting, Mr Claude Moreno, General Director of Oriental Marketing Services, comments: “In this complex market, where consumption habits are different of western model, where law is far from being stable and perfect, and where relationships with public administration are still predominant, ally to a Chinese partner is a necessity, and thus, the key becomes the choice of the right partner”. You should pay a lot of attention to the partner selection, and consider 3 major criteria: financial resources, experience, and “guanxi”, that is to say the different connections this partner may have with administration, but also with other actors of economic world.
You must be patient to find interesting prospects, but also to create with them relationships which will not be useless in your future development. “In China, the contract is the basis of negotiation”, comments Claude Moreno. “You have to maintain close relationships with your Chinese partner, who will be more liable to respect the strategy defined”.

Create a professional network
To understand Chinese market, and be able to find the best partners who will know how to develop a franchise concept, it remains necessary to create a professional consultants network with strong experience in China. Oriental Marketing Services is a Marketing and Business Development Consulting company, specialized in Chinese market. Located since more than twenty years in Hong Kong, we have now offices in Shanghai, Beijing, and Guangzhou. Our teams are composed of multicultural consultants (Chinese and French) who have a perfect knowledge of Chinese market, Chinese culture, and all the difficulties the companies decided to invest China have to face. Our role is to help companies during their whole development process in China: Market Studies, research and selection of partners, organization of seminars, negotiation support…

Among our success in Asia, we helped a famous French biscuit company to increase its market shares upon 45% in its activity in Japan. We also have implemented a French miniature perfumes range in several duty free shops in China, worked in luxury industry as consultants for fashion accessories activity for high-class dressmaking companies.

For many years, Oriental Marketing has developed a department specialized in franchise development. We are now preparing the introduction of very famous French franchises, such as the worldwide leader in laundry services, the European leader in cosmetic retailing, one of the worldwide leaders in luxury grocery, and one of the leader of high-class French hairdressing. Thanks to our Chinese market knowledge, we can access to the key actors in retailing and franchise industries: potential investors, franchise associations, exhibition organizers, legal firms, press… this experience and this know-how, Oriental Marketing proposes to let you take advantage of it right now in your development in China. [T.C. for OMS]